How spot dealers make $

[sunnyskies]

Basically there's something called InterBank system where the big boys quote their bids and offers. The spreads are real tight there. Now our retail spot dealer takes those spreads, tacks on a bit of a mark-up, wolla you get the 3 point spreads that they all seem to hype. When you place an order with them, they basically make money off riskless arbitrage between their wider spreads and the tighter spreads at the Interbank market. Like Interbank spread, is 5x6, and dealer's spread is 4x7. So when you buy, they buy the currency at 6 and immediately sell it to you at 7: +1 in profit.

Correct?

 

[late apex]

No.

Your minimum trade size as a retail online forex trader -- a lot or a mini-lot -- is 1-2 orders of magnitude less than the interbank dealers' minimum trade size on EBS and Reuters, the two primary forex networks.

A direct access online FX shop could not hedge in the way you describe even if they wanted to. They hedge their aggregate risk exposure continually.

 

[Kicking]

Quote from late apex:

No.

They hedge their aggregate risk exposure continually.

and how do they do this ?
judging by the proliferation of FX retail outfits that business must be a real money machine, yet they are exposed to significant risks for ex during economic news announcements . How do they hedge against open limit orders which no one knows whether they will be marketable or not in the next 2 seconds?

 

[Chood]

Quote from Kicking:

and how do they do this ?
judging by the proliferation of FX retail outfits that business must be a real money machine, yet they are exposed to significant risks for ex during economic news announcements . How do they hedge against open limit orders which no one knows whether they will be marketable or not in the next 2 seconds?

The customer is not actually trading the forex market regardless of the fx retailer, or “dealer,” he uses. He’s simply trading the quote made by the shop. The shop is not laying his position off in the interbank market: it's the counterparty and simply is holding the other side. No “hedging” needed or wanted. The customer’s loss is its win. For that reason, the fx dealer makes the quotes as good for itself as it can at all times. In the case of news, where making the quotes is risky, it may (1) run spikes to stops to both profit and reduce risk, (2) simply freeze the customers out or, if the first two fail, (3) dishonor the limit orders that would beat it.

The interbank market may provide the general contour for a dealer’s quotes, but it is not determinative. The shop’s position, which is the opposite of its customers’ net positions, is determinative. That fact alone tilts the odds away from the customers. Add to it the bucketshop tricks you may have read about, such as spiking prices, dishonoring orders for technical reasons – the excuse “misquote” comes to mind – and so on.

The fx retailer I used manipulated prices against my orders and refused to fill profitable limit orders. The latter occurred three times, in each case after the limit price of the order was breached with room to spare. The shop called the breaching prices “misquotes.” It’s own charts - showing the prices it made for other customers in the same pairs – showed otherwise. The charts proved the breaching prices.

Here's an illustration of what I encountered that might be useful:
________

- Casino patron goes to blackjack table and plunks down three black chips ($300, the size, say, of a fx mini-account). The hand is dealt: he gets nineteen.
- Dealer has a ten showing and turns his hole card, an eight, for total of eighteen. Man smiles.
- “Mis-card,” dealer says as he fans the deck, pulls out a ten, and lays it face up squarely on top of the eight. “20” dealer says as he rakes in the three black chips.
________

The above is one trick in the bag of tricks facing customers of fx retailers. Now, knowing those are the rules that operate, why would anyone open an account with a fx retailer?

 

[Faris]

Quote from Chood:

The customer is not actually trading the forex market regardless of the fx retailer, or “dealer,” he uses. He’s simply trading the quote made by the shop. The shop is not laying his position off in the interbank market: it's the counterparty and simply is holding the other side. No “hedging” needed or wanted. The customer’s loss is its win. For that reason, the fx dealer makes the quotes as good for itself as it can at all times. In the case of news, where making the quotes is risky, it may (1) run spikes to stops to both profit and reduce risk, (2) simply freeze the customers out or, if the first two fail, (3) dishonor the limit orders that would beat it.

The interbank market may provide the general contour for a dealer’s quotes, but it is not determinative. The shop’s position, which is the opposite of its customers’ net positions, is determinative. That fact alone tilts the odds away from the customers. Add to it the bucketshop tricks you may have read about, such as spiking prices, dishonoring orders for technical reasons – the excuse “misquote” comes to mind – and so on.

The fx retailer I used manipulated prices against my orders and refused to fill profitable limit orders. The latter occurred three times, in each case after the limit price of the order was breached with room to spare. The shop called the breaching prices “misquotes.” It’s own charts - showing the prices it made for other customers in the same pairs – showed otherwise. The charts proved the breaching prices.

Here's an illustration of what I encountered that might be useful:
________

- Casino patron goes to blackjack table and plunks down three black chips ($300, the size, say, of a fx mini-account). The hand is dealt: he gets nineteen.
- Dealer has a ten showing and turns his hole card, an eight, for total of eighteen. Man smiles.
- “Mis-card,” dealer says as he fans the deck, pulls out a ten, and lays it face up squarely on top of the eight. “20” dealer says as he rakes in the three black chips.
________

The above is one trick in the bag of tricks facing customers of fx retailers. Now, knowing those are the rules that operate, why would anyone open an account with a fx retailer?

Hello

The above is an excellent analogy.
Due to your experiences with retail forex, do you feel currency futures is the only alternative for the small investor who wants to trade FX?
Are there any other alternatives?
Is it possible to trade directly through a bank?

Faris

 

[Chood]

Quote from Faris:

Hello

The above is an excellent analogy.
Due to your experiences with retail forex, do you feel currency futures is the only alternative for the small investor who wants to trade FX?
Are there any other alternatives?
Is it possible to trade directly through a bank?

Faris

Try this thread in this forum: "Pure agent against market maker." It describes one alternative you ask about.

 

[Chood]

Quote from Chood:

Try this thread in this forum: "Pure agent against market maker." It describes one alternative you ask about.

continuing the above response: Futures are the only way I would trade FX, but some trustworthy veterans on this board have said that IB's cash (i.e., spot) product, which is described in the thread I cite, is a true matching system, meaning IB has no stake against the customer. That would distinguish it from the retail shops. Beyond that I can't say because I have not used it.